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06.04.2023 | KPMG Law Insights

BGH on the appointment of managing directors: What corporate groups should bear in mind

Members of the management board of a stock corporation may not appoint themselves as managing directors of a subsidiary GmbH. This was decided by the Federal Court of Justice (BGH) on January 17, 2023 (Case No. II ZB 6/22), thus resolving an issue that has been disputed for some time. Now the decision has been published.

Two out of three members of the Board of Management of the stock corporation were to take over the management of a newly founded wholly owned subsidiary. The two authorized a lawyer, who then made the appointment of the managing director. However, this detour was of no use to the board members. The registration court refused to register the GmbH on the grounds of a defective appointment of the managing director. The GmbH in formation did not accept this and continued to pursue its case up to the BGH. The BGH considered the order to be a so-called insider transaction pursuant to § 181 case 1 BGB. The provision prohibits representatives from entering into transactions with themselves on behalf of another person. This is exactly what happened, however, because the board members in question acted on behalf of the AG as shareholder of the GmbH on the one hand and on their own behalf on the other.

The registration court had also required approval of the appointment of the managing director by the supervisory board of the parent company. This was not confirmed by the BGH. The appointment of the managing director could also have been made by the third member of the management board together with an authorized signatory, the judges said.

The detour via authorized third parties no longer works

Members of the management board of a parent company are usually appointed as managing directors of subsidiary limited liability companies in order to ensure control and management authority within the group over the actions of these persons. However, in such constellations, the pitfalls of powers of attorney and representation are often lost sight of: Section 181 of the German Civil Code (BGB) in particular is a complicated provision with many disputes and results, some of which contradict the first gut feeling and therefore come as a surprise.

The detour via the authorization of a third person to perform the acts in question has been a popular strategy to avoid an insider transaction. This solution no longer works after the BGH ruling. In this context, the BGH focuses on the purpose of the provision and clarifies that the (sub)representation by the third person does not change the fact that, in the case of a self-appointment, the management board member acts both for himself and on behalf of the company.

The BGH decision thus clearly shows that when appointing members of the parent company’s management board as managing directors of subsidiary GmbHs, particular attention must be paid to the passing of resolutions and the powers of representation. This also applies in the case of group companies with a different legal form and, above all, if foreign corporate forms are added, in whose legal systems comparable standards to Section 181 of the German Civil Code may not exist.

Parent companies should pay attention to the following when appointing managing directors

If the management body of the parent company wishes to appoint its own members as managing directors of a subsidiary, ideally other persons should act on the side of the parent company than the persons to be appointed. If this is not possible, for example because all existing members of the management board are to become managing directors, it must be examined whether the supervisory board can exempt the acting persons from the restriction of § 181 BGB.

Alternatively, consideration should be given to approval of the appointment of the managing director by the supervisory board. As a preventive measure, care can also be taken when appointing members to committees and in the further design of management structures to ensure that, if necessary, procuration is granted at the parent company. The procuration should then be sufficient to enable the parent company, together with only one member of its management, to perform the relevant acts within the scope of investment management at the subsidiary.

Group law is also a matter of corporate governance

Both the structuring of the legal may and the sensible staffing of management bodies within corporate groups should be undertaken with the necessary precision: § Section 181 of the German Civil Code (BGB) can present an unexpected obstacle not only in the case of appointments to management boards. Problems can also arise in the case of subsequent discharge resolutions or transactions between two group companies if, for example, the members of the committees are identical or if no consistent attention is paid to exemptions from the restrictions of Section 181 of the German Civil Code (BGB). A sensible arrangement of the respective powers of representation at an early stage – as far as legally possible – and a forward-looking composition of committees can save such problems to a large extent.

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